Basics of variance calculation-Understanding Period End activities, WIP and Variances
This is my 6th document in costing and this one is intended to explain variance calculation and related activities at period end.
I will walk you through the period end activities and variance calculation. In this document I have try to limit myself period end activities in relation with WIP & Variance calculation. See below screenshot it is a background job (SM36) scheduled to run period end activities. We calculate Actual Overhead (T-Code CO43), Work in Process (KKAO), Variance calculation (KKS1) and Settlement (CO88). Along with this I have also included CO summarization KKRC for various KKBC reports.
Figure 6.1- Background Job of period end activities
Let’s understand each of the transactions and its usage in detail
During a month actual primary cost such as wages, utility, are debited to cost center. Some of the costs may be included in planned activity rate and allocated to products from cost centers during activity confirmation. Overhead calculation offers most flexible way of allocating cost to different products during period end overhead calculation. When you run the transaction code CO43 (CO42 for individually) system will go to the cost sheet where the overhead key, calculation base and credit key define. In overhead key the rates are define plan as well as actual (to view cost sheet transaction code is KZS2) at the time of running the overhead system calculate the overhead amount and post the same to respective production order. Please refer my scan document on the same overhead cost in costing sheet http://scn.sap.com/docs/DOC-49880
WIP-Work in Process
Production costs associated with manufacturing orders are temporarily tracked on the profit and loss financial statement. Work in Process represents production cost of incomplete assemblies at period end. In order to balance sheet items accurately reflect company assets WIP costs are temporarily moved to WIP Balance and profit and loss account. There are two types in WIP process valuation
-WIP at Target valued based on Cost Estimate (Mainly used in Product Cost By period)
-WIP at actual valued based on actual debits to a manufacturing orders. (Mainly used in Product Cost by Order)
The advantage of WIP at target calculation is that variances and WIP can be posted at same time. If production orders remain open for multiple periods variances reconciliation is easier using WIP at target in Product Cost By period.
WIP is calculated each period until the status of an order status set to fully delivered or TECO, and then the entire WIP is cancelled and variance is calculated in Product Cost BY order.
As we know it helps us to provide the difference between 0rder debits and credits.
- Target cost are determined during variance calculation therefore few check points before we calculate Variances in Product Cost By period.
- There must be Goods receipt for FG for at least one of the manufacturing orders
- There must be variance key in the product cost collector
- Standard cost estimate should be valid the day of posting for product cost Collector
- The material origin indicator should be selected for all cost related components
- Variance configuration must be carried out (see below variance configuration)
- The product Cost Collector must have settlement type (PER)
- Variance calculation using (KKS1/KKS5)
To calculate variances in Product Cost by Order which the manufacturing order must meet the following conditions
- Settlement Type FUL (Full settlement type) in settlement rule
- Status DLV (delivered) or technical Complete (TECO)
Note-You can use Settlement type PER ( Period ) in Product Cost By Order where companies does not wanted to calculate WIP and each order should be settled in the period. In that case you will have to manually set the order status to TECO in order to calculate variances. This is not a SAP standard practice but some companies do this.
Total variance-This is the only variance which is relevant to settlements, the difference between debit and credits are settled to financial accounting, PCA and COPA. Target cost version 0 is used to calculate the total variance. Other variances like Production variances and Planning variances are for information purpose only.
Settlement is the last step in period end closing for product cost collector and Production orders.
I have added one more step to get those KKBC reports for different purpose you can configure the same in KKR0
Now let’s see some basic configuration required for variance calculation SAP
By checking scrap indicator the value of scrap is calculated during variance calculation and deducted from total variance.
When a material Master is created a default variance key is proposed for the costing 1
Step-3 T-code OKVG
If you don’t select a particular category, the variances of that category will be added to the category of remaining variances. An exception is the scrap variances. Scrap variances that are not shown as such can go into any other variance category on the input side selection in this screen as we already defined it in Variance Key.
Defining Valuation variant for Scrap and WIP (Only Product cost By Period) – Configure it in IMG node
At period end Target cost are temporarily moved from Product cost collector to WIP Account. Variance is also calculated and posted at the same time.
Note-In Product cost by Order this does not apply as WIP and Scrap is valuated at actual.
Define Target Cost version
Target cost are based on current standard cost estimate which is actual credits and control cost which is actual cost is actual debits. Valuation variant is to control which cost estimate is used to valuate scrap. You can use different target versions for different variance like production variance and planning variances with other parameters.
This is a basic document for Variance calculation and various steps involved with it. This is intended for beginners who is starting to learn about Controlling. Please refer my previous documents posted in SCN for fair idea about costing Basic of costing.
Let me know the feedback .I will try to come up with Cost center variance reporting and Scrap variances in my future document which will complete the series of Variance calculation in SAP.